only middle class households to receive PV feed-in-tariff

As currently proposed, the feed-in-tariffs are likely to be the exclusive domain of the middle class with lower income households shut out from participating.

To prevent the FiT being accessible only to the middle classes, it needs to be set at a level that allows banks and private equity providers to step in and cover the capital costs of PV while sharing some of the benefit with householders.

In order to be attractive, the return needs to be between 7.5% and 8.5% (ungeared) depending on interest rate and how the FiT revenues are taxed. Some institutional investors say it needs to be higher, but if we stick to this figure we stay on the conservative side.

Taking PV as an example, the FiT as currently proposed would generate a 3-4% return in a mature market (e.g. £4700/kWp installed for a household system as we’re seeing in Italy). In a less mature market (e.g. £5.5k/kWp) the return would be 1.9%.

Looking at it another way, in order to achieve a 7.5% return in the real world based on the proposed FiT, the installed price of PV would need to be £3350/kWp! The other £1.35k is value shortfall (i.e. the difference between £3.35k and £4.7), which might be covered by an eco-minded middle income household but will certainly not be attractive to a low income household.

Bottom line: the proposed FiT for PV is too low. In order to provide an 8% return in a mature market (£4.7k/kWp installed for a small system), the FiT needs to be set at around 55p/kWh. For the largest schemes (>100kW), this would step down to 37p.

Sorry I’ve departed from my usual policy of putting all the underlying numbers up. The calculations are pretty straightforward but they require a spreadsheet and I don’t have a public facing version yet.

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5 Responses

The consultation on the FiT is open until 15 October (see the consultation page here). The FiT applies to a range of renewable energy technology but, among those, PV is especially important as it’s the technology that will be applicable to the largest number of households.

In general the FiT for technology applicable to the built environment (e.g. PV and biomass CHP) has been underwhelming to say the least. At the same time, things like medium scale wind (which is already viable under the ROC regime) get a hell of a boost. Not sure why…

From my understanding FIT was meant to be implemented in 2010 but they still have not decided on the methodology. It will be interesting to see how these tariffs interact with the existing benefits such as the ROC and capital grant through the LCBP.
What’s your opinion on all these microgeneration? Do you see a future for these in the UK?

Yes, it’s meant to come into effect in April of next year. There’s quite a lot of information in the consultation documents on methodology. Also on the proposed interaction between the FiT and other incentives such as ROCs. There’s a long way to go, but there’s enough information to get an idea of how DECC are minded. Take a look.

As for microgen in the UK, the govt seem to have a 2% target fixed in their heads – so 2% of total generation. This is far too low. I think microgen should be playing a larger role in the generation mix with PV, community-scale wind, and biomass CHP taking the bulk of that burden.

Would be interested in your views regarding the fact that no energy efficiency measures are required to get the FIT. They argue that this is because energy efficiency is mostly (but not always) related to heat. But I feel they’ve missed a trick for a couple of reasons:

(1) Government has a target for all lofts and cavities to be insulated by 2015.

(2) If it was simply required that unfilled cavities and unlagged lofts would need to be insulated alongside the microgen provision, my estimates suggest the ROI would increase by two percentage points for an investment of £500. In other words, an increase in capital costs of around 5% increases the ROI by around 25%.